Bond Bubble Watch: Drunk and Out of Control

Here’s a fun characterization of the bond market from Bloomberg columnist and London bureau chief Mark Gilbert: “Like a drunk at a party, the bond market is starting to bump into tables, telling off-color jokes, talking too loudly and spilling drinks. The smart guests will steer clear before he starts screaming at his shoes and wanders off to pray to the porcelain.” How uncouth!

Gilbert says that, as happened to banks during the credit crisis, investors are now looking to distinguish between governments that have been too profligate and are now doomed and those that might be big enough to survive. Investors are flogging the tar out of Greece and Ireland by charging exhorbitant rates for their debt, while the U.S. and Germany are able to raise money at astoundingly low rates. Trouble is, as was the case with the banks, the risk hasn’t gone away, it’s just found a new place to hide.

Investors may be taking on too much risk in long-dated, low-yielding bonds like U.S. Treasuries or Black & Decker, Gilbert says. Having started with alcohol metaphors, he takes the parable to its logical conclusion. “The problem with hangovers is that once they fade, the prospect of getting drunk all over again starts to seem like a great idea. This fixed-income party will end badly.” Bond Bubble Watch: Drunk and Out of Control